New 401(k) disclosure rules now in effect

Despite major investment scandals over the last decade that depleted thousands of 401(k) type savings plans, it’s alarming how many investors remain in the dark when it comes to the management of their savings plans and the multiple, often hidden, fees charged to maintain their accounts.

As one of many efforts to combat corporate and sponsor negligence, the Department of Labor’s Employee Benefits Security Administration (EBSA) announced new statement disclosure rules that went into effect on July 1. Plan participants will see a new third-quarter statement this fall that highlights the management actions and various fees charged in a clear and transparent format.

The infamous collapse of Enron a decade ago spurred a dramatic increase in government oversight and boosted efforts to educate 401(k) type plan participants.

At the height of its success, Enron was one of the world’s leading energy companies and was even named “America’s Most Innovative Company” by Fortune magazine for six consecutive years. In 2000, Enron employed 20,000 people and claimed revenue upwards of $101 billion.

On Dec. 2, 2001, Enron filed for bankruptcy. It was later determined that executives grossly misrepresented earnings reports and kept investors in the dark regarding the true financial condition of the company. Lies were ultimately substantiated by audit reports performed by an independent accounting firm.

The proliferation of fraudulent earnings attracted new Enron investors and increased investments from current stockholders. Company executives profited from the unethical and unlawful gain of investors and employee’s monies under false pretenses.

In the end, investors sustained losses of more than $70 billion while 20,000 employees lost their life savings overnight.

At that time, employees were at the mercy of their plan sponsor. Often, companies reinvested all 401(k) contributions into their own stock, with no alternate option available. In addition, the law did not adequately ensure that plan participants were given or had access to information necessary to make informed decisions about their savings account, including information about fees and expenses.

As of July, the EBSA has made yet another round of sweeping changes to the manner in which 401(k) investments are made and reported. The final rules ensure the delivery of investment-related information is in a format that enables workers to meaningfully compare the investment options under their pension plans. Service providers not in compliance as of July 1 will be subject to penalties.

The EBSA also extended many of these reporting changes to 403(b) plans, or nonprofit sponsored plans, which are essentially the same as 401(k) plans. In recent years, government scrutiny and oversight of 403(b) plans has also increased.

Nonprofit sponsored plans are subject to the same reporting and audit requirements as ERISA plans. However, smaller plans with fewer than 100 participants are generally exempt from the audit requirements.

Plan sponsors are now being held to higher standard of care and due diligence.

Participants are beginning to pay more attention to their statements and ask important questions. Companies must establish a prudent process when selecting fund service providers to ensure that plan participants and their beneficiaries are getting diverse investment options and reasonable fees that correlate to the level of service.

If you are a plan sponsor or trustee, it’s essential to audit your employee benefit plan on a regular basis. A quality audit will safeguard employees’ assets and ensure the financial integrity of the company.

Richard Henry is a certified public accountant and business adviser at Holland, Henry & Bromley, LLP. He can be reached at 912-235-3410 or richard@hhbcpa.com.